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Brexit update December

Brexit update December

Whilst British Prime Minister, Theresa May, has survived today's confidence vote of Tory MPs, the United Kingdom and the European Union appear to be approaching a stalemate in the Brexit talks. At this point, four scenarios are possible:

Approval of the current deal – The UK Parliament could approve the EU Withdrawal Agreement and Political Declaration negotiated by Prime Minister May's Government and the European Commission. However, the odds of this happening appear to be negligible.

A revised deal – The UK and the EU could broker an alternative deal in the coming weeks. Although it is difficult to picture a mutually acceptable alternative agreement, other than one that provides for more time to negotiate by postponing the UK's departure date from the EU.

No deal – If the UK and the EU fail to reach an agreement, the default position is that the UK would "crash out" of the EU on 29 March 2019. The disruption this (increasingly likely) scenario would cause businesses should not be underestimated.

No Brexit – Alternatively, the UK could unilaterally stop the Brexit process by revoking Article 50. This could emerge as the preferred course of action following a General Election or a second referendum in the UK.

If Brexit happens, it will cause significant disruption for most New Zealand businesses dealing with the UK market. The big question would be "when?", and the increasingly likely answer is "before 29 March 2019".

This alert explains the disruption that Brexit would cause for New Zealand businesses, and identifies steps that they can take to minimise their Brexit-related risks in two key areas: export logistics and contracts.

Brexit, the disruptor

The EU is a 'Single Market' and a 'Customs Union'. This means that goods, services, capital and people move freely around the EU, as if the EU member states were one country. If Brexit happens, the UK would leave the Single Market and the Customs Union on 29 March 2019 at the earliest. If it leaves with a deal of some sort, the UK Government will try to negotiate an ambitious free trade agreement to govern future UK:EU economic relations. If it leaves with no deal, the UK and the EU would trade with each other according to non-preferential, World Trade Organisation rules, from 29 March 2019 onwards.

The UK's departure from the EU would have major implications for New Zealand businesses dealing with the UK and the EU, as it would necessitate fundamental changes in the laws, policies and operational arrangements governing customs, competition, data protection, employment, immigration, intellectual property, product standards, tax and trade, among other areas. The financial services, food and beverage, medical devices, pharmaceuticals, transportation and distribution sectors would probably be the most significantly disrupted. Traders should expect continued GBP depreciation and volatility, shortages of warehousing space in key UK centres, and significant border delays as the UK's departure date gets closer.

New Zealand businesses dealing with the UK and the EU are encouraged to plan for all possible Brexit scenarios. This includes a “no deal” Brexit, which would significantly disrupt UK:NZ trade and investment relations throughout 2019. In the next section, we provide high-level guidance on how New Zealand businesses can best prepare themselves in two key areas: export logistics and contracts.

Export logistics

If Brexit happens, there would be major changes in the laws, policies and operational arrangements governing the movement of goods across the UK:EU border. For example:

traders would be required to file import and export declarations;

carriers would need to file safety and security declarations;

customs checks would be reintroduced, and veterinary and biosecurity checks would become more prevalent;

import duties may be levied and import taxes would be collected;

excise duties would be payable;

quantitative restrictions may be imposed;

import and export licenses may be required;

preferential rules of origin would no longer apply;

product standards would no longer be harmonised and would likely diverge over time; and

having a single EU agent for customs filings and corporate representation would no longer be acceptable for those doing business in both the UK and the EU.

These changes would principally affect parties trading across the UK:EU border, as many New Zealand businesses do. However, some of these changes would also affect goods traded between the UK and New Zealand. When boiled down, these changes would generate new costs, red tape, administrative changes and delays for most New Zealand businesses that trade with the UK. Compliance may significantly impact upon your operating costs and the costs of getting your goods to market. These costs need to be factored into your pricing.

Affected businesses are encouraged to map their NZ:UK and UK:EU trade, and consider the potential supply chain impacts of Brexit. As part of this process, businesses may want to consider the following questions:

New market access conditions – Are new tariffs, taxes, fees, charges or quantitative restrictions likely to be introduced? If so, will your trade remain possible and profitable?

Useful customs facilitations and procedures – If your market access conditions are likely to deteriorate, could you improve them by using UK customs facilitations or procedures (e.g. the UK's Inwards Processing Relief or Trusted Trader schemes)?

New regulatory compliance obligations – Are new regulatory compliance obligations likely to be introduced (e.g. standards, or registration, certification and documentary requirements, etc)? If so, are those obligations material, and who would perform them?

New representative requirements – Would your existing European agents be authorised to conduct your business in a post-Brexit environment (e.g. do they have the required registrations and EORI numbers)?

Significant border and administrative delays – Do you need to consider alternative supply chain arrangements in order to mitigate the risks of transportation delays and the shortage of warehousing space in the UK? These questions will be particularly important if you export fresh or chilled product to the UK or operate a just-in-time delivery model.

Supply chain partners – Are your supply chain partners prepared for Brexit and is there merit in discussing contingency arrangements with them?

Contracts

Brexit would not alter the fundamentals of contract law in the UK. However, it would have a significant impact on underlying commercial bargains with a UK nexus.

Affected businesses are encouraged to review all their contracts (or arrangements) with a UK nexus. This includes contracts involving: counterparties based in the UK; business transiting the UK; and business priced in GBP. Transactions to be completed before 29 March 2019 may not be impacted at all. But enduring contracts and standard terms and conditions used with UK counterparties are likely to be impacted. The nature of the impact will depend upon: the business sector concerned; the nature of the contract (i.e. consumer contract for sale or distribution agreement, etc); and the objectives of parties.

All new contracts should be drafted in anticipation of the specific changes that Brexit would bring, and in a way that limits exposure to remaining uncertainty. If risks are identified in existing contracts, New Zealand businesses should try to renegotiate them or otherwise look to mitigate those risks. As part of this process, businesses may want to consider the following questions:

Pricing – In order to mitigate the negative price impacts of Brexit, could you consider: opting for flexible pricing models where possible; or making fixed pricing conditional on a set of carefully crafted assumptions and ensure that renegotiation is mandatory if those assumptions no longer hold?

Exchange rates – In order to minimise exposure to GBP depreciation and exchange rate volatility, could you consider: dual invoicing for imports from the UK; negotiating forward contracts; or making smart use of foreign currency accounts?

Change control mechanisms –- If Brexit leads to a situation where the cost of your business increases substantially and is no longer profitable, a change control mechanism, force majeure clause or material adverse change clause may help. Do your existing contractual clauses offer sufficient protection? If not, could you insert a bespoke Brexit clause to mitigate your risks.